Bigpayout et al v. Mantex Enterprises et al

Filing 38

MEMORANDUM DECISION and Order-granting in part and denying in part 31 Motion to Dismiss ; granting in part and denying in part 31 Motion to Dismiss for Failure to State a Claim ; granting in part and denying in part 31 Motion to Dismiss for Lack of Jurisdiction ; granting in part and denying in part 31 Motion to Dismiss Party. See Order for details. Signed by Judge Robert J. Shelby on 10/14/14. (jmr)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

BIGPAYOUT, LLC; FINISH POINT
MARKETING, LLC

MEMORANDUM
DECISION & ORDER

Plaintiffs,
v.
MANTEX ENTERPRISES, LTD; AMBER
BUSINESS SERVICES; and LUIS
HENRQIEU SANTOS REIS VALENTE
SOARES,

Case No. 2:12-CV-01183-RJS
Judge Robert J. Shelby

Defendant.

Defendant Luis Henrqieu Santos Reis Valente Soares moves to dismiss Plaintiffs’ claims
for fraudulent inducement, misrepresentation, alter ego, and conversion. 1 After careful
consideration of the arguments and relevant legal authorities, the court concludes that Plaintiff
Finish Point Marketing, LLC failed to adequately plead its fraudulent inducement claim, and that
the Second Amended Complaint 2 fails to state actionable claims for misrepresentation and
conversion. At the same time, however, the court concludes that Plaintiff Bigpayout, LLC may
proceed in part on its fraudulent inducement claim. Accordingly, Mr. Soares’s motion to dismiss
is GRANTED IN PART and DENIED IN PART.

1

Dkt. No. 31.

2

Dkt. No. 19. The court will refer to the Second Amended Complaint as the “Complaint.”

BACKGROUND
This case arises out of a dispute over an advertising agreement. According to Plaintiffs,
Advantage Multi Marketing, LLC provided Internet lead-generation services to third-parties. 3 In
early 2009, Advantage entered into negotiations with Mr. Soares to provide pay-per-lead services
to Mantex Enterprises, LTD. 4 Mr. Soares purportedly acted as owner and manager of Mantex. 5
Plaintiffs allege that during the course of the negotiations Mr. Soares made specific
representations about Mantex’s ability to pay for these services, in part because Advantage
expressed concerns about the high cost of directing Internet traffic. 6 The parties eventually
entered into a written agreement (Agreement) for lead-generation services.
Advantage and Mantex began performing under the Agreement in February 2009. 7 On
several occasions, it is alleged that Mantex failed to pay the entire amount invoiced for services.
Mr. Soares met with representatives of Advantage throughout 2009 to discuss outstanding
balances, which at one point exceeded $2,451,901. 8 In December 2009, Advantage stopped
providing lead-generation services to Mantex. 9 In the months that followed, Mr. Soares
allegedly met with Advantage to discuss payment of the debt that arose under the Agreement. 10

3

Dkt. No. 19, ¶ 9.

4

Id. ¶¶ 12-20.

5

Id. ¶¶ 10, 18, 21, 57.

6

Id. ¶¶ 12-20.

7

Id. ¶¶ 23-32.

8

Id. ¶¶ 33-48.

9

Id. ¶ 49.

10

Id. ¶¶ 50-54.

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During the summer of 2009, Plaintiff Finish Point Marketing, LLC agreed to assist
Mantex by providing English-speaking agents to help with escalated sales call volume. 11 Finish
Point met with Mr. Soares and entered into an agreement (Customer Service Agreement), the
terms of which required Mantex to pay an hourly rate and customer service commissions. 12
Over a three-month period, Mantex accrued an outstanding obligation of $165,423. 13 The
Complaint contains cursory allegations that Mr. Soares made representations about Mantex’s
intention to pay outstanding invoices in order to ensure that Finish Point continued to provide its
services. 14
Jeff Gardner and Ryan Gardner own Advantage, Finish Point, and Bigpayout, LLC. 15
Both individuals participated in several negotiations with Mr. Soares and Mantex. 16 At some
point, Advantage assigned its interest and rights under the Agreement to Bigpayout. 17 Bigpayout
and Finish Point bring this action, asserting claims for breach of contract, fraudulent inducement,
negligent misrepresentation, unjust enrichment, promissory estoppel, alter ego/subsidiary
liability, and conversion. 18

11

Id. ¶¶ 67-69.

12

Id. ¶¶ 68-69.

13

Id. ¶¶ 72-77.

14

Id. ¶¶ 104-05.

15

Id. ¶¶ 67-68; Dkt. No. 32, ¶¶ 14-15.

16

Id. ¶¶ 39, 41-45, 47-48.

17

Dkt. No. 19, ¶¶ 22, 81.

18

Originally, Advantage and Bigpayout sued Mantex and Mr. Soares in the Fourth Judicial District, State of Utah.
(Dkt. No. 31, at iv.) Shortly thereafter, their counsel filed a First Amended Complaint, which named Bigpayout, Jeff
Gardner, and Ryan Gardner as plaintiffs. (Dkt. No. 2-1.) After removal to this court and consideration of a motion
to dismiss, the Second Amended Complaint was filed, which named Bigpayout and Finish Point as plaintiffs.

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Mr. Soares moves to dismiss claims under three separate theories. 19 First, Mr. Soares
argues that Bigpayout lacks standing to assert Advantage’s claims as an assignee. Second, Mr.
Soares argues Plaintiffs failed to plead fraud or misrepresentation with the requisite particularity.
Third, Mr. Soares maintains that Plaintiffs fail to state a plausible basis for three of the tort
claims, and that in any event, several of the claims should be barred by the economic loss rule.
ANALYSIS
I.

LEGAL STANDARDS
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim for relief that is plausible on its face.’” 20 When evaluating the
adequacy of a complaint, courts “assume the factual allegations are true and ask whether it is
plausible that the plaintiff is entitled to relief.” 21 Although courts refrain from weighing
evidence at this stage, legal conclusions or “[t]hreadbare recitals of the elements of a cause of
action” are insufficient to survive a motion to dismiss. 22 While “[t]echnical fact pleading is not
required, [a] complaint must still provide enough factual allegations for a court to infer potential
victory.” 23
The Federal Rules of Civil Procedure impose an additional pleading requirement on fraud
claims. 24 Under Rule 9(b), a party alleging fraud “must state with particularity the circumstances

19

See Dkt. No. 31.

20

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

21

Bixler v. Foster, 596 F.3d 751, 756 (10th Cir. 2010) (quoting Gallagher v. Shelton, 587 F.3d 1063, 1068 (10th Cir.
2009)).
22

Id. (quoting Iqbal, 556 U.S. at 678); Peterson v. Grisham, 594 F.3d 723, 727 (10th Cir. 2010).

23

Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).

24

5A CHARLES A. WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 1298 (3d ed. 1998) (observing that
plausibility standard applies to fraud or mistake claims).

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constituting fraud or mistake.” 25 In the Tenth Circuit, a plaintiff asserting a fraud claim must, at
a minimum, “set forth the who, what, when, where and how of the alleged fraud” and describe
“the time, place, and contents of the false representation, the identity of the party making the
false statements and the consequences thereof.” 26 At the same time, “[m]alice, intent,
knowledge, and other conditions of mind of a person may be averred generally.” 27
Finally, federal courts apply a modified legal standard to a motion to dismiss for lack of
subject matter jurisdiction under Rule 12(b)(1). 28 If a defendant presents a facial challenge to
subject matter jurisdiction, the court “must accept the allegations in the complaint as true.” 29 But
if a defendant challenges the facts on which subject matter jurisdiction rests, the court “may not
presume the truthfulness of the complaint’s factual allegations [but] has wide discretion to allow
affidavits, other documents, and a limited evidentiary hearing[.]” 30 Mere reference to these
materials does not convert the question of jurisdiction into a summary judgment motion. 31
II.

STANDING
Mr. Soares argues that Bigpayout lacks standing to assert any claims. 32 Mr. Soares

alleges that a valid assignment is an indispensable prerequisite to standing, and that Bigpayout
failed to plead, much less prove, the existence of a proper assignment. Mr. Soares also contends

25

Fed. R. Civ. P. 9(b).

26

U.S. ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir. 2006) (internal
quotation marks and citations omitted).
27

Fed. R. Civ. P. 9(b).

28

Holt v. United States, 46 F.3d 1000, 1002-03 (10th Cir. 1995).

29

Id.at 1002 (citing Ohio Nat’l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990)).

30

Id. at 1003.

31

Id.

32

Dkt. No. 31, at 1 (citing Fed. R. Civ. P. 12(b)(1)).

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that Advantage could not assign its fraud claims to Bigpayout as a matter of Utah law. 33 Neither
theory, however, provides a basis for dismissal at this stage.
Mr. Soares first argues that Bigpayout failed to provide fair notice or a factual basis for
asserting Advantage’s claims. The court disagrees. Facially, the Complaint provides notice of
the basis of standing by alleging, in two separate paragraphs, that Advantage assigned its claims
to Bigpayout. 34 Although Mr. Soares appears to challenge the factual basis of the assignment,
Plaintiffs submitted an affidavit describing the means by which Bigpayout acquired Advantage’s
assets and liabilities, 35 as well as a copy of the “Assignment of Rights,” through which
Advantage transferred to Bigpayout “any and all assets,” included the right to enforce contractual
obligations on Advantage’s behalf. 36 Based on the allegations contained in the Complaint and
the exhibits proffered by Bigpayout, the court concludes that Bigpayout adequately alleged a
basis for standing and presented sufficient evidence to survive a motion to dismiss under Rule
12(b)(1).
Mr. Soares next argues that Utah law bars the assignment of fraud claims. 37 While Utah
courts recognize that “a mere naked right to recover for fraud is not assignable” as a matter of
law, 38 the court concludes that this case presents an exception to the general rule.
The Utah Supreme Court recently discussed limitations on the assignment of fraud claims
in Westgate Resorts, Ltd. v. Consumer Prot. Grp. LLC. 39 In Westgate, customers who claimed to

33

See Holt, 46 F.3d at 1003 (permitting facial and factual challenges to subject matter jurisdiction).

34

Dkt. No. 19, ¶¶ 22, 81.

35

Dkt. No. 32-1, at 1.

36

Dkt. No. 32-2.

37

See Dkt. 31, at 5-8.

38

Westgate Resorts, Ltd. v. Consumer Prot. Grp., LLC, 2012 UT 55, ¶ 33, 285 P.3d 1219.

39

Id.

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have been defrauded by a large real estate timeshare company assigned their claims against the
company to a consumer protection group, which subsequently brought suit. 40 The trial court
dismissed a Utah Consumer Sales Practices Act claim, concluding that the consumer group
lacked standing to assert a claim that sounded in fraud. 41 The Utah Supreme Court reversed,
favorably citing other cases in which Utah courts had permitted the assignment of an action for
fraud where the party asserting the claim seeks to recover property. 42 The Court reiterated that
the “rule of non-assignability no longer extends to all actions arising [in tort]” and “an
assignment is upheld when it carries with it a subsisting substantial right to property independent
of the right to sue for fraud.” 43 Because the consumer group sought the return of money spent by
individual customers, the Court held that the claims were assignable as a matter of law. 44
In this case, Bigpayout’s claims are a far cry from “a mere naked right to recover for
fraud.” 45 Rather, Bigpayout seeks to recover property in the form of payments to third-party
affiliates who were paid to direct Internet traffic and profit to Defendants. 46 Similar to Westgate,
Bigpayout seeks to recover property expended as a direct result of Mr. Soares’s representations.
As in Westgate, the recovery itself sounds in contract and fraud. 47 Recognizing that the “trend of
judicial opinion has been to enlarge rather than restrict the causes that may be assigned,” the

40

Id. ¶¶ 2-7.

41

Id. ¶¶ 29-32

42

Id. ¶¶ 33-36 (“[S]ound legal principles [persuade us] an assignment is upheld when it carries with it a subsisting
substantial right to property independent of the right to sue for fraud.”).
43

Id. ¶ 33 (internal quotation marks and citations omitted) (alteration in original).

44

Id. ¶¶ 35; but see Gilbert v. DHC Dev., LLC, No. 2:08-CV-258, 2013 WL 4881492, at *9-11 (D. Utah Sept. 12,
2013) (dismissing three economic tort claims, because the assigned claims did “not expressly seek the return or
recovery of any property (e.g., purchase money paid)”).
45

Id. at *10.

46

Dkt. No. 32, at 9-10.

47

Dkt. No. 19, ¶¶ 80-123.

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court concludes that Bigpayout adequately alleges “a subsisting substantial right to property
independent of the right to sue for fraud.” 48 Because Utah law does not prohibit the assignment
of a claim in this context, the court concludes that Bigpayout has standing to assert Advantage’s
claims and denies Mr. Soares’s Rule 12(b)(1) motion.
III.

FRAUDULENT INDUCEMENT
Mr. Soares moves for dismissal of Plaintiffs’ fraudulent inducement claims, arguing that:

(a) the economic loss doctrine acts as a bar to recovery for fraudulent inducement; (b) Plaintiffs
fail to plead fraudulent inducement with particularity; and (c) the Complaint does not articulate a
plausible fraudulent inducement claim. 49 The court considers each argument in turn.
A.

The Economic Loss Doctrine
Mr. Soares argues that the economic loss rule bars Plaintiffs’ fraudulent inducement

claims as a matter of law, because both Bigpayout and Finish Point purportedly seek recovery of
economic damages arising out of contractual obligations.
“The economic loss rule is a judicially created doctrine that marks the fundamental
boundary between contract law, which protects expectancy interests created through agreement
between parties, and tort law, which protects individuals . . . from physical harm by imposing a
duty of reasonable care.” 50 The rule “bars recovery of economic losses in negligence actions
unless the plaintiff can show physical damage to other property or bodily injury” and “prevents
parties who have contracted with each other from recovery beyond the bargained-for risks.” 51
Stated differently, the rule “bars all tort claims seeking recovery for economic losses when the

48

Westgate Resorts, 2012 UT 55, ¶ 33.

49

Dkt. No. 31, at 9-17, 19, 22-23.

50

SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assocs., Inc., 2001 UT 54, ¶ 32, 28 P.3d 669.

51

Sunridge Dev. Corp. v. RB & G Eng'g, Inc., 2010 UT 6, ¶ 28, 230 P.3d 1000.

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claims are not based on a duty independent of the contractual obligations between the parties.” 52
Applying these general principles, federal and state courts have concluded that the economic loss
rule prevents recovery for negligent and intentional torts where the duties between the parties
sound only in contract. 53
Here, Plaintiffs allege that Mr. Soares and Mantex fraudulently induced Finish Point and
Advantage into entering contractual agreements to provide services, and then fraudulently
induced Finish Point and Advantage to continue providing services under the agreements despite
significant outstanding invoices. To the extent that these claims arose prior to the formation of
the contract, they are independent of the duties the parties undertook upon formation of the
contractual agreement. As a result, the economic loss rule does not require dismissal of the
fraudulent inducement claim in its entirety.
At the same time, the court concludes that any claim for fraudulent inducement to recover
economic damages arising out of the Agreement or the Customer Service Agreement will be
barred by the economic loss rule, because Plaintiffs have not asserted a legal duty independent of
the contractual obligations after the parties entered into the contracts. In other words, neither
Bigpayout nor Finish Point may assert a fraudulent inducement claim for acts or conduct that
occurred during the period of time each was in a contractual relationship with Mantex or Mr.
Soares. With this conclusion in mind, the court considers whether each party stated their claims
plausibly and with particularity, as required by Rules 8(a) and 9(b).

52

Anapoell v. Am. Express Bus. Fin. Corp., No. 2:07-CV-198, 2007 WL 4270548, at *6 (D. Utah Nov. 30, 2007).

53

See, e.g., id.; Grynberg v. Questar Pipeline Co., 2003 UT 8, ¶¶ 48-53, 70 P.3d 1 (applying Wyoming version of
economic loss rule); Hermansen v. Tasulis, 2002 UT 52, ¶ 17, 48 P.3d 235 (adopting and applying Colorado rule to
non-intentional torts); see also Reighard v. Yates, 2012 UT 45, ¶ 20, 285 P.3d 1168 (“The economic loss rule
prevents recovery of economic damages under a theory of nonintentional tort when a contract covers the subject
matter of the dispute.”).

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B.

Federal Rule of Civil Procedure 9(b)
As discussed above, a party asserting fraud must allege the “who, what, when, where, and

how of the alleged fraud” and describe “the time, place, content, and consequences of the
fraudulent conduct.” 54 The purpose of this requirement is “to afford defendant fair notice of
plaintiff’s claims and the factual ground upon which [they] are based.” 55
U.S. ex rel. Lemmon v. Envirocare of Utah, Inc. illustrates the manner in which courts
should apply Rule 9(b). 56 In Lemmon, employees brought a claim against a hazardous waste
disposal company for purportedly violating the False Claim Act. 57 The trial court dismissed the
claim, concluding that the employees failed to satisfy the requirements of Rules 8(a), 9(b), and
12(b)(6). 58 The Tenth Circuit reversed, holding that the employees satisfied the legal standard by
identifying the names and positions of employees engaged in the fraudulent activity, describing
the specific instances of contractual and regulatory breaches, documenting the dates on which
potential violations took place, stating the location of the violations, and providing factual details
describing how the fraudulent activity took place. 59 Although the company presented a series of
hypothetical questions that remained unanswered on the face of the complaint, the Tenth Circuit
recognized that parties were not required “to provide a factual basis for every allegation” or

54

U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1171 (10th Cir. 2010) (internal quotation marks
and citations omitted).

55

Id. at 1172 (quoting Koch v. Koch Indus., Inc., 203 F.3d 1202, 1236 (10th Cir. 2000)) (alteration in original).

56

Id. at 1163.

57

Id. at 1165-66.

58

Id. at 1165.

59

Id. (concluding plaintiff adequately pleaded a claim under the False Claims Act).

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include “all the necessary information” in every allegation. 60 Rather, a plaintiff “need only show
that, taken as a whole, a complaint entitled them to relief” under Rules 9(b) and 8(a). 61
Here, Bigpayout provided sufficient factual information to satisfy Rule 9’s particularity
requirement. Bigpayout alleged “who” made the fraudulent representations by identifying Mr.
Soares as both owner of Mantex and the individual who negotiated the terms of the Agreement
with Advantage and the Gardners. 62 The Complaint provided notice of “what” by describing the
statements and representations made by Mr. Soares to Advantage. 63 It also articulated “when”
the fraudulent activity occurred by identifying the approximate dates of negotiations giving rise
to the fraud. 64 Finally, the Complaint describes “how” the fraudulent inducement took place by
articulating the manner in which representations concerning Mantex’s ability and willingness to
pay induced Advantage’s reliance. 65 Accordingly, the court concludes that the Complaint states
with sufficient particularity Advantage’s fraudulent inducement claim.
At the same time, however, the court concludes that the Complaint fails to articulate
Finish Point’s fraud claim with the requisite particularity. Although the Complaint generally
alleges that Mr. Soares made similar representations to Finish Point,66 the Complaint fails to
specifically identify the date or subject matter of any fraudulent representations prior to the time
frame that the parties entered into the Customer Service Agreement. 67 And the Complaint

60

Id. at 1173.

61

Id.; but see Osborn v. Brown, No. 2:12-CV-775, 2013 WL 1411781 (D. Utah Apr. 8, 2013).

62

Dkt. No. 19, ¶¶ 10, 12-21, 23-24, 26, 27, 30, 32, 37, 39, 102.

63

Id. ¶¶ 13-18, 29-33, 40, 44.

64

Id. ¶¶ 12-19, 32-37.

65

Id. ¶¶ 15-17, 30, 46, 106-10.

66

Id. ¶¶ 105 (“Soares did the same with FPM in order to keep FMP handling customer support.”).

67

Id. ¶¶ 67-79.

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similarly fails to provide dates or descriptions of the content of misrepresentations by Mr. Soares
after Finish Point began providing its services. 68 Accordingly, where Finish Point has “not given
details showing the who, what, when, where, and how” of the alleged conduct, as required by
Rule 9(b), the court dismisses Finish Point’s fraudulent inducement claim. 69
C.

Federal Rule of Civil Procedure 8(a)
Mr. Soares argues that Plaintiffs fail to state plausible fraudulent inducement claims

because the Complaint does not explicitly “claim that Advantage or Finish Point were ignorant of
Mantex’s alleged undercapitalization.” 70 In Utah, a party seeking to prevail on such a claim
must prove that it acted “reasonably and in ignorance of [the] falsity” of the statement. 71
The court must assume the truth of factual allegations and apply its “judicial experience
and common sense” when evaluating the plausibility of a particular claim. 72 In this case, the
Complaint includes sufficient factual allegations for the court to conclude that Advantage lacked
knowledge of the extent to which Mantex and Mr. Soares were willing or able to pay for its
services. 73 For example, Bigpayout describes in detail the negotiations and representations that
allegedly induced Advantage’s conduct, including Mr. Soares’s representations about his track
record, Mantex’s ability to cover costs, and his personal promise to pay outstanding invoices—in
short, the fraudulent promises went beyond mere undercapitalization. 74 Bigpayout also alleges

68

See id. ¶ 78.

69

See Osborn v. Brown, No. 2:12-CV-775, 2013 WL 1411781, at *4 (D. Utah Apr. 8, 2013) (reaching similar
conclusion where party referred to collective groups of defendants without providing detail or specifics).
70

Dkt. No. 31, at 19.

71

Daines v. Vincent, 2008 UT 51, ¶ 38, 190 P.3d 1269 (quoting Armed Forces Ins. Exch. v. Harrison, 2003 UT 14, ¶
16, 70 P.3d 35).

72

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009); Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).

73

Dkt. No. 19, ¶¶ 12-18, 37-39, 78-79, 100-12.

74

Id. ¶¶ 12-18.

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that Advantage relied on Mr. Soares’s representations. 75 Assuming the truth of the allegations in
the Complaint, a reasonable juror could conclude that Advantage acted reasonably and in
ignorance of the falsity of the statements. Mr. Soares invites the court to draw a contrary
conclusion, but such a consideration would be inappropriate at this stage of the proceeding. 76
Accordingly, the court concludes that Rules 8(a) does not provide an adequate basis for
dismissing Bigpayout’s fraudulent inducement claim.
In contrast, the court concludes that Finish Point’s allegations fail to give rise to a
plausible fraudulent inducement claim. 77 As discussed above, the economic loss rule operates as
a bar to any tort claims arising out of the Customer Service Agreement. 78 Stated differently,
where Finish Point fails to allege any independent duty arising after the Customer Service
Agreement, the rule limits Finish Point’s claim to pre-contract representations. Here, Finish
Point failed to include in the Complaint any factual allegations of fraudulent statements that
induced acts prior to the formation of the Customer Service Agreement. 79 The Complaint’s
description of Finish Point’s relationship with Mr. Soares is also devoid of the types of factual
allegations that would permit a court to “infer potential victory.” 80 As a result, Rule 8(a) also
requires dismissal of Finish Point’s fraudulent inducement claim.
IV.

MISREPRESENTATION
Mr. Soares argues that the economic loss rule bars Plaintiffs’ negligent misrepresentation

claims. The rule provides that “a party suffering only economic loss from the breach of an

75

Id. ¶¶ 110-12.

76

Dkt. No. 31, at 19.

77

See, e.g., Osborn v. Brown, No. 2:12-CV-775, 2013 WL 1411781, at *4 (D. Utah Apr. 8, 2013).

78

See supra Part III.A.

79

Dkt. No. 19, ¶¶ 67-79.

80

Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).

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express or implied contractual duty may not assert a tort claim for such a breach absent an
independent duty of care under tort law.” 81
Under Utah law, a party seeking to prevail on a negligent misrepresentation claim “must
demonstrate the existence of a duty running between the parties.” 82 Courts interpreting this
requirement have concluded that a misrepresentation or omission is actionable only where the
“defendant has a duty to disclose” or “there exists a duty to speak.” 83 For example, in Smith v.
Frandsen, the Utah Supreme Court concluded that a material omission could give rise to liability,
but only after the Court held that policy considerations justified imposing a limited duty on real
estate developers to disclose discoverable defects to remote purchasers. 84
In this case, Plaintiffs argue that Mr. Soares and Mantex had a duty to speak because they
possessed superior knowledge on matters relating to their finances and their ability to perform
under any contract. 85 In support of this proposition, Plaintiffs cite to First Security Bank N.A. v.
Banberry Development Corp., a case in which the Utah Supreme Court described in general
terms an individual’s responsibility to disclose the truth. 86 Plaintiffs also appear to suggest that
Smith v. Frandsen imposes an independent duty on every negotiating party to disclose any and
all material facts. But this is far too broad an interpretation—the Smith court simply recognized
that the duty to disclose attached only if policy considerations or the parties’ relationship gave

81

Hermansen v. Tasulis, 2002 UT 52, ¶ 16, 48 P.3d 235 (citation omitted) (emphasis in original). Plaintiffs briefly
argued that the economic loss rule does not extend to non-parties to a contract. This is not so. Davencourt at
Pilgrims Landing Homeowners Ass'n v. Davencourt at Pilgrims Landing, LC, 2009 UT 65, ¶ 23, 221 P.3d 234; see,
e.g., Aclys Int'l v. Equifax, 438 F. App'x 689, 691 (10th Cir. 2011).
82

Smith v. Frandsen, 2004 UT 55, ¶ 9, 94 P.3d 919.

83

Id. ¶ 11.

84

Id. ¶¶ 14-17; see also Hermansen v. Tasulis, 2002 UT 52, ¶ 18-20 (recognizing independent legal duty of licensed
real estate professional to disclose known material defects in property).
85

Dkt. No. 32, at 24.

86

First Sec. Bank of Utah N.A. v. Banberry Dev. Corp., 786 P.2d 1326, 1331 (Utah 1990).

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rise to a duty—it does not stand for the proposition that the duty exists in every interaction. 87 In
fact, Utah courts have declined to recognize a duty to speak “where the parties deal at arm’s
length, and where the underlying facts are reasonably within the knowledge of both parties.” 88
Here, the parties engaged in an arm’s length transactions. For nearly a month, the parties
negotiated the objectives of their agreement and the payment terms. 89 The factual allegations in
the Complaint neither suggest nor expressly allege the existence of a fiduciary relationship. And
Plaintiffs do not cite a single case in which a Utah court recognized an independent duty to
disclose for parties entering into or negotiating similar commercial arrangements. The only legal
duties apparent on the face of the Complaint arise out of contract negotiations and performance.
In the absence of an independent legal duty, the court concludes that Plaintiffs’ negligent
misrepresentation theory fails to state an actionable claim. 90
V.

ALTER EGO
Mr. Soares argues that Plaintiffs’ alter ego claim fails to satisfy Rule 8(a). As discussed

above, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” 91
Accepting the truth of the Plaintiffs’ factual allegations, the court concludes that the
Complaint adequately alleges a basis for recovery under the doctrine of alter ego, at least for the

87

Id. at 1333-34 (concluding absence of fiduciary relationship or special circumstances foreclosed duty to disclose).

88

Sugarhouse Fin. Co. v. Anderson, 610 P.2d 1369, 1373 (Utah 1980) (“Under such circumstances, the plaintiff is
obligated to take reasonable steps to inform himself, and to protect his own interests.”).
89

Dkt. No. 19, ¶¶ 12-22, 67-68.

90

Plaintiffs briefly argue that Mr. Soares’s voluntary assumption of Mantex’s debts gave rise to an independent legal
duty, and that his failure to make these payments constituted a breach of his “duty to exercise due care in performing
the voluntarily assumed duties.” (Dkt. No. 32, at 26.) Plaintiffs fail to cite a Utah decision that supports finding an
independent duty in this context. While this specific aspect of the claim appears to sound in negligence, rather than
misrepresentation, the court concludes that it nevertheless arises out of contractual obligations and falls squarely
within the economic loss rule. Because the court concludes that the economic loss rule requires dismissal, it need
not consider whether Rule 9(b) applies as an independent bar to Plaintiffs’ misrepresentation claims.

91

Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

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purposes of Rule 8(a).

In Utah, the doctrine of alter ego is “not an independent claim for relief;

rather, it is a theory of liability.” 92 When considering whether alter ego supplies a basis for
piercing the corporate veil, courts consider (a) whether there is a “unity of interest and ownership
[such] that the separate personalities of the corporation and the individual no longer exist” and
(b) whether “observance of the corporate form would sanction a fraud, promote injustice, or an
inequitable result would follow.” 93 The Utah Supreme Court adopted an eight factor test for
analyzing alter ego claims:
(1) undercapitalization of a one-man corporation; (2) failure to
observe corporate formalities; (3) nonpayment of dividends; (4)
siphoning of corporate funds by the dominant stockholder; (5)
nonfunctioning of other officers or directors; (6) absence of
corporate records; (7) the use of the corporation as a facade for
operations of the dominant stockholder or stockholders; and (8) the
use of the corporate entity in promoting injustice or fraud. 94
These factors “should be viewed as non-exclusive considerations and not dispositive
elements.” 95
In this case, the Complaint articulates a sufficient factual basis for applying the alter ego
doctrine. The Complaint provides a plausible basis for concluding that a unity of interests
existed between Mr. Soares and Mantex. For example, Mr. Soares represented himself as the
owner of Mantex, negotiated on Mantex’s behalf, entered into agreements on the company’s
behalf, purportedly exercised control over the company, and promised to personally cover
Mantex’s outstanding obligations. 96 Assuming the truth of the allegations describing his role

92

Jones & Trevor Mktg., Inc. v. Lowry, 2012 UT 39, ¶ 6 n.1, 284 P.3d 630; White Family Harmony Inv., Ltd. v.
Transwestern W. Valley, LLC, No. 2:05-CV-495, 2005 WL 2893784, at *5 (D. Utah Oct. 31, 2005).
93

Lowry, 2012 UT 39, ¶ 14.

94

Id. ¶ 16 (quoting Colman v. Colman, 743 P.2d 782, 786 (Utah Ct. App. 1987)).

95

Id. ¶ 17.

96

Dkt. No. 19, ¶¶ 12-18, 21, 26, 29-30, 32-33, 39, 44, 46, 47, 57, 65.

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within Mantex and in the negotiations, it is entirely plausible that observance of the corporate
form would sanction fraud or lead to inequitable results. Because these factual allegations are
“enough . . . for a court to infer potential victory,” the court finds that the Complaint states a
plausible basis for recovering under an alter ego theory. 97
VI.

CONVERSION
Finally, Mr. Soares argues that Plaintiffs’ conversion claim fails to state a plausible claim

under Rule 8(a). After careful consideration, the court agrees.
In Utah, conversion requires “an act of wilful interference with a chattel, done without
lawful justification by which the person entitled thereto is deprived of its use and possession.” 98
Because conversion is intended to remedy an interference with a possessory right to property, “a
party alleging conversion must show that he or she is entitled to immediate possession of the
property at the time of the alleged conversion” and “the right to maintain the action may not be
based upon a right to possession at a future time.” 99 Although “money represented by a general
debt cannot be the subject of conversion, an exception is recognized for misappropriated funds
placed in the custody of another for a definite application.” 100
As a preliminary matter, the court concludes that the exception to the general rule has no
application here. Unlike cases where a plaintiff places funds in a third party’s custody for a
particular use, which the third party then misuses, 101 the funds in question here purportedly came

97

Peterson v. Grisham, 594 F.3d 723, 727 (10th Cir. 2010).

98

State v. Twitchell, 832 P.2d 866, 870 (Utah Ct. App. 1992).

99

Fibro Trust, Inc. v. Brahman Fin., Inc., 1999 UT 13, ¶ 20, 974 P.2d 288 (internal quotation marks and citations
omitted) (emphasis in original).

100

Twitchell, 832 P.2d at 870.

101

See, e.g., Boyd v. Wimes, 664 S.W.2d 596, 599 (Mo. Ct. App. 1984).

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from Mantex’s customers. Moreover, the Complaint fails to identify funds that Advantage or
Finish Point placed with Mantex for a particular use or definite application.
More importantly, the Complaint fails to state a plausible factual basis for satisfying an
essential element of conversion: an immediate possessory interest, as opposed to a right to
possession at a future time. During oral argument on the motion, counsel suggested that the
merchant account used by the parties gave Bigpayout an immediate and possessory interest in the
funds. Yet, the Complaint itself contains only two cursory references to merchant accounts. 102
The mere mention of a merchant account is not enough to create a plausible immediate
possessory interest. The only specific reference in the Complaint to an immediate possessory
interest is framed as a legal conclusion, which this court is instructed to disregard when
evaluating the plausibility of a claim at this stage of the proceeding. 103 Where the “four corners”
of the Complaint fail to provide any other factual basis for inferring an immediate and
possessory interest in a third-party’s account, the court must dismiss the conversion claim. 104
CONCLUSION
For the reasons stated above, Mr. Soares’s motion to dismiss is GRANTED IN PART
and DENIED IN PART. The court DISMISSES WITH PREJUDICE the following claims
against Mr. Soares: the Third Cause of Action; the Seventh Cause of Action, and Bigpayout’s
Second Cause of Action to the extent it is based on post-contract formation conduct. The court
also DISMISSES WITH PREJUDICE Finish Point’s Second Cause of Action against Mr.
Soares.

102

Dkt. No. 19, ¶¶ 30, 165.

103

See id. ¶ 168; Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (“While legal conclusions can provide the framework
of a complaint, they must be supported by factual allegations.”).
104

Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (“The nature of a Rule 12(b)(6) motion tests the
sufficiency of the allegations within the four corners of the complaint after taking those allegations as true.”).

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SO ORDERED this 14th day of October, 2014.
BY THE COURT:

________________________________________
ROBERT J. SHELBY
United States District Judge

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